Sunday, August 02, 2015

Freshwater’s Wrong Turn (Wonkish): Paul Romer has been writing a series of posts on the problem he calls “mathiness”, in which economists write down fairly hard-to-understand mathematical models accompanied by verbal claims that don’t actually match what’s going on in the math. Most recently, he has been recounting the pushback he’s getting from freshwater macro types, who seem him as allying himself with evil people like me — whereas he sees them as having turned away from science toward a legalistic, adversarial form of pleading.

You can guess where I stand on this. But in his latest, he notes some of the freshwater types appealing to their glorious past, claiming that Robert Lucas in particular has a record of intellectual transparency that should insulate him from criticism now. PR replies that Lucas once was like that, but no longer, and asks what happened.

Well, I’m pretty sure I know the answer. ...

It's hard to do an extract capturing all the points, so you'll likely want to read the full post, but in summary:

So what happened to freshwater, I’d argue, is that a movement that started by doing interesting work was corrupted by its early hubris; the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems, and sent them off on the path Paul now finds so troubling.

Recent tweets, email, etc. in response to posts I've done on mathiness reinforce just how unwilling many are to confront their tribalism. In the past, I've blamed the problems in macro on, in part, the sociology within the profession (leading to a less than scientific approach to problems as each side plays the advocacy game) and nothing that has happened lately has altered that view.

In case you somehow missed that socioeconomic mobility is low in the US relative to many other countries, this is Anne Kim at Washington Monthly:

The Myth of Mobility: ... Surveys find that nearly two-thirds of Americans believe it’s “still possible to start out poor in this country, work hard and become rich,” while also discounting the value of family background and connections in achieving success. In a 2014 survey by the Pew Research Center, just 18 percent of Americans said “belonging to a wealthy family” was “very important” for getting ahead.

But a mounting pile of evidence is beginning to show that family background is, in fact, determinative. ...

“[C]hildren raised in low-income families will probably have very low incomes as adults, while children raised in high-income families can anticipate very high incomes as adults,” write co-authors Pablo Mitnik and David Grusky of the Stanford University Center on Poverty and Inequality in a report published by the Pew Charitable Trusts and the Russell Sage Foundation.

In particular, the study finds, children raised in wealthy households can expect to enjoy incomes that are at least 200 percent larger than the expected incomes of children raised in low-income households and 75 percent larger than the incomes of children from the middle class.

As a result of the persistence of these advantages - and disadvantages - from generation to generation, Mitnik and Grusky conclude: “[T]he United States is very immobile.” ...

…Peter says yes they did, Philip says no, and I’m with Peter on this one...

I have two points to make here…

My first point is one that is obvious to an economic historian. But I do not see picked up by the lawyers. It is that central banks are government-chartered corporations rather than government agencies precisely to give them additional freedom of action. Corporations can and do do things that are ultra vires. Governments then either sanction them, or decide not to.

During British financial crises of the nineteenth century, the Bank of England repeatedly violated the terms of its 1844 charter restricting its powers to print bank notes. The Chancellor the Exchequer would then not take any steps in response to sanction it. Such a policy–of writing a charter for the central bank with the expectation that in an emergency the Bank would do whatever was needed to stabilize the economy in spite of the limitations placed on it by its charter, was clearly envisioned by the author of the 1844 charter, then Prime Minister Robert Peel, who expected to see the Governor of the Bank of England take responsibility for doing what was needed...

Peel saw a choice: either (i) give the Bank of England explicit powers (and so run the risk that financiers, expecting that those powers would be used, would exploit moral hazard and so produce irrational exuberance, extravagant overleverage, and repeated frequent financial crises), or (ii) forbid the Bank of England from acting and rely on financial statesmen in the future to take actions ultra vires under the principle that in the end salus populi suprema lex. Peel chose (ii). To him and his peers, the risks that granting explicit powers would enable moral hazard appeared greater than the risks that when a crisis should come the makers of monetary policy would not understand their proper role. And the Federal Reserve banks have inherited their non-agency but corporation legal structure from the Bank of England.

My second point is that Bernanke, Geithner, and their company at the head of the Federal Reserve in 2008 really, really, really want their decision not to have rescued Lehman in the fall of 2008 to have been a judgment call that went wrong.

They really do not want to have let a situation develop in which there is a systemically-important financial institution that they cannot support. Should any systemically-important financial institution ever approach a state in which the central bank could not support it in an emergency, the most elementary principles of central banking command that such an institution be resolved or shut down immediately.

Creating markets: ... My point here is a simple one. Whether effective markets and private ownership can be created depends upon particular institutional and technical conditions.

This is, of course, a variant on Coase's famous point (pdf) - that there are costs to market transacting. These costs must be weighed against the costs of other forms of economic organisation - be it the firm or state control.

This applies to issues much nearer home. Whether public sector services should be privatized depends upon precise institutional detail: is it possible to write contracts which ensure a high quality of service without excessive rent-seeking? In Coasean terms, is the cost of market transacting lower than the cost of in-house production?

The answer will vary from service to service and place to place. .... It all depends upon subtle details.

To listen to some commentators is to believe that markets are the solution to all of our problems. Health care not working? Bring in the private sector. Need to rebuild a war-torn country? Send in the private contractors. Emergency relief after earthquakes, hurricanes, and tornadoes? Wal-Mart with a contract is the answer. ...

Markets don't work just because we get out of the way. When government contracts are moved to the private sector without ensuring the proper incentives are in place, there will be problems - waste, inefficiency, higher prices than needed, etc. There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.

If there is no competition, or insufficient competition in the provision of government services by private sector firms, there is no reason to expect the market to deliver an efficient outcome, an outcome free of waste and inefficiency. Why would we think that giving a private sector firm a monopoly in the provision of a public service would yield an efficient outcome? If the projects are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, why would we expect an ideal outcome just because the private sector is involved? If cronyism limits the participants in the marketplace, why would we expect an outcome that maximizes the public interest?

There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better. ...

For government goods and services, when incentives consistent with a competitive outcome are present, we should get government out of the way and privatize, and there are lots of circumstances where this will be appropriate. There is no reason at all for the government to produce its own pencils and pens, buying them from the private sector is more efficient so long as the bids are competitive.

When competitive conditions are not met but can be regulated, the regulations should be put in place and the private sector left to do its thing... There's no reason for government to do anything except ensure that the incentives to motivate competitive behavior are in place and enforced.

But rampant privatization based upon some misguided notion that markets are always best, privatization that does not proceed by first ensuring that market incentives are consistent with the public interest, doesn't do us any good. ...

Microfoundations 2.0?: The idea that hypotheses about social structures and forces require microfoundations has been around for at least 40 years. Maarten Janssen’s New Palgrave essay on microfoundations documents the history of the concept in economics; link. E. Roy Weintraub was among the first to emphasize the term within economics, with his 1979 Microfoundations: The Compatibility of Microeconomics and Macroeconomics. During the early 1980s the contributors to analytical Marxism used the idea to attempt to give greater grip to some of Marx's key explanations (falling rate of profit, industrial reserve army, tendency towards crisis). Several such strategies are represented in John Roemer's Analytical Marxism. My own The Scientific Marx (1986) and Varieties of Social Explanation (1991) took up the topic in detail and relied on it as a basic tenet of social research strategy. The concept is strongly compatible with Jon Elster's approach to social explanation in Nuts and Bolts for the Social Sciences (1989), though the term itself does not appear in this book or in the 2007 revised edition.

Here is Janssen's description in the New Palgrave of the idea of microfoundations in economics:

The quest to understand microfoundations is an effort to understand aggregate economic phenomena in terms of the behavior of individual economic entities and their interactions. These interactions can involve both market and non-market interactions.

In The Scientific Marx the idea was formulated along these lines:

Marxist social scientists have recently argued, however, that macro-explanations stand in need of microfoundations; detailed accounts of the pathways by which macro-level social patterns come about. (1986: 127)

The requirement of microfoundations is both metaphysical -- our statements about the social world need to admit of microfoundations -- and methodological -- it suggests a research strategy along the lines of Coleman's boat (link). This is a strategy of disaggregation, a "dissecting" strategy, and a non-threatening strategy of reduction. (I am thinking here of the very sensible ideas about the scientific status of reduction advanced in William Wimsatt's "Reductive Explanation: A Functional Account"; link).

The emphasis on the need for microfoundations is a very logical implication of the position of "ontological individualism" -- the idea that social entities and powers depend upon facts about individual actors in social interactions and nothing else. (My own version of this idea is the notion of methodological localism; link.) It is unsupportable to postulate disembodied social entities, powers, or properties for which we cannot imagine an individual-level substrate. So it is natural to infer that claims about social entities need to be accompanied in some fashion by an account of how they are embodied at the individual level; and this is a call for microfoundations. (As noted in an earlier post, Brian Epstein has mounted a very challenging argument against ontological individualism; link.) Another reason that the microfoundations idea is appealing is that it is a very natural way of formulating a core scientific question about the social world: "How does it work?" To provide microfoundations for a high-level social process or structure (for example, the falling rate of profit), we are looking for a set of mechanisms at the level of a set of actors within a set of social arrangements that result in the observed social-level fact. A call for microfoundations is a call for mechanisms at a lower level, answering the question, "How does this process work?"

In fact, the demand for microfoundations appears to be analogous to the question, why is glass transparent? We want to know what it is about the substrate at the individual level that constitutes the macro-fact of glass transmitting light. Organization type A is prone to normal accidents. What is it about the circumstances and actions of individuals in A-organizations that increases the likelihood of normal accidents?

One reason why the microfoundations concept was specifically appealing in application to Marx's social theories in the 1970s was the fact that great advances were being made in the field of collective action theory. Then-current interpretations of Marx's theories were couched at a highly structural level; but it seemed clear that it was necessary to identify the processes through which class interest, class conflict, ideologies, or states emerged in concrete terms at the individual level. (This is one reason I found E. P. Thompson's The Making of the English Working Class (1966) so enlightening.) Advances in game theory (assurance games, prisoners' dilemmas), Mancur Olson's demonstration of the gap between group interest and individual interest in The Logic of Collective Action: Public Goods and the Theory of Groups (1965), Thomas Schelling's brilliant unpacking of puzzling collective behavior onto underlying individual behavior in Micromotives and Macrobehavior (1978), Russell Hardin's further exposition of collective action problems in Collective Action (1982), and Robert Axelrod's discovery of the underlying individual behaviors that produce cooperation in The Evolution of Cooperation (1984) provided social scientists with new tools for reconstructing complex collective phenomena based on simple assumptions about individual actors. These were very concrete analytical resources that promised help further explanations of complex social behavior. They provided a degree of confidence that important sociological questions could be addressed using a microfoundations framework.

There are several important recent challenges to aspects of the microfoundations approach, however.

So what are the recent challenges? First, there is the idea that social properties are sometimes emergent in a strong sense: not derivable from facts about the components. This would seem to imply that microfoundations are not possible for such properties.

Second, there is the idea that some meso entities have stable causal properties that do not require explicit microfoundations in order to be scientifically useful. (An example would be Perrow's claim that certain forms of organizations are more conducive to normal accidents than others.) If we take this idea very seriously, then perhaps microfoundations are not crucial in such theories.

Third, there is the idea that meso entities may sometimes exert downward causation: they may influence events in the substrate which in turn influence other meso states, implying that there will be some meso-level outcomes for which there cannot be microfoundations exclusively located at the substrate level.

All of this implies that we need to take a fresh look at the theory of microfoundations. Is there a role for this concept in a research metaphysics in which only a very weak version of ontological individualism is postulated; where we give some degree of autonomy to meso-level causes; where we countenance either a weak or strong claim of emergence; and where we admit of full downward causation from some meso-level structures to patterns of individual behavior?

In once sense my own thinking about microfoundations has already incorporated some of these concerns; I've arrived at "microfoundations 1.1" in my own formulations. In particular, I have put aside the idea that explanations must incorporate microfoundations and instead embraced the weaker requirement of availability of microfoundations (link). Essentially I relaxed the requirement to stipulate only that we must be confident that microfoundations exist, without actually producing them. And I've relied on the idea of "relative explanatory autonomy" to excuse the sociologist from the need to reproduce the microfoundations underlying the claim he or she advances (link).

But is this enough? There are weaker positions that could serve to replace the MF thesis. For now, the question is this: does the concept of microfoundations continue to do important work in the meta-theory of the social sciences?

I've talked about this many times, e.g., but it's worth making this point about aggregating from individual agents to macroeconomic aggregates once again (it deals, for one, with the emergent properties objection above -- it's the reason representative agent models are used, it seems to avoid the aggregation issue). This is from Kevin Hoover:

... Exact aggregation requires that utility functions be identical and homothetic … Translated into behavioral terms, it requires that every agent subject to aggregation have the same preferences (you must share the same taste for chocolate with Warren Buffett) and those preferences must be the same except for a scale factor (Warren Buffet with an income of $10 billion per year must consume one million times as much chocolate as Warren Buffet with an income of $10,000 per year). This is not the world that we live in. The Sonnenschein-Mantel-Debreu theorem shows theoretically that, in an idealized general-equilibrium model in which each individual agent has a regularly specified preference function, aggregate excess demand functions inherit only a few of the regularity properties of the underlying individual excess demand functions: continuity, homogeneity of degree zero (i.e., the independence of demand from simple rescalings of all prices), Walras’s law (i.e., the sum of the value of all excess demands is zero), and that demand rises as price falls (i.e., that demand curves ceteris paribus income effects are downward sloping) … These regularity conditions are very weak and put so few restrictions on aggregate relationships that the theorem is sometimes called “the anything goes theorem.”

The importance of the theorem for the representative-agent model is that it cuts off any facile analogy between even empirically well-established individual preferences and preferences that might be assigned to a representative agent to rationalize observed aggregate demand. The theorem establishes that, even in the most favorable case, there is a conceptual chasm between the microeconomic analysis and the macroeconomic analysis. The reasoning of the representative-agent modelers would be analogous to a physicist attempting to model the macro- behavior of a gas by treating it as single, room-size molecule. The theorem demonstrates that there is no warrant for the notion that the behavior of the aggregate is just the behavior of the individual writ large: the interactions among the individual agents, even in the most idealized model, shapes in an exceedingly complex way the behavior of the aggregate economy. Not only does the representative-agent model fail to provide an analysis of those interactions, but it seems likely that that they will defy an analysis that insists on starting with the individual, and it is certain that no one knows at this point how to begin to provide an empirically relevant analysis on that basis.

Friday, July 31, 2015

There may be a complex market living in your gut: Conventional theories used by economists for the past 150 years to explain how societies buy, sell, and trade goods and services may be able to unlock mysteries about the behavior of microbial life on earth, according to a study by researchers from Claremont Graduate University, Boston University, and Columbia University.

The findings, published July 29 in the open access journal PLOS ONE, provide new insight into the behavior of the planet's oldest and tiniest life forms, and also create a new framework for examining larger questions about biological evolution and productivity.

Joshua Tasoff, an economics professor at Claremont Graduate University, conducted the study with Michael Mee of the Department of Biomedical Engineering at Boston University and Harris Wang of the Department of Systems Biology at Columbia University. ...

Although microbes are ubiquitous, they interact with each other in complicated ways that are not well understood. A large fraction of microbial life exists in complex communities where the exchange of molecules and proteins is vital for their survival. They trade these essential resources to promote their own growth in ways that are similar to countries that exchange goods in modern economic markets.

Inspired by these similarities, Tasoff, Mee, and Wang applied the general equilibrium theory of economics, which explains the exchange of resources in complex economies, to understand the trade of resources in microbial communities. ...

The results confirmed the team's predictions. As trade increased, the bacterial communities grew faster. And while all of the microbes benefited from trade, the more a bacteria strain exported, the slower it grew relative to the importing bacteria strain.

"That means that species face a tradeoff between growing their communities faster versus increasing their own population relative to that of a trading partner," Tasoff said.

The findings open the door for the application of other economic concepts that could improve our understanding of microbial and other biological communities, Tasoff said.

1. Economist N did X. 2. X is wrong because it undermines the scientific method.

#1 is a positive assertion, a statement about “what is …”#2 is a normative assertion, a statement about “what ought …” As you would expect from an economist, the normative assertion in #2 is based on what I thought would be a shared premise: that the scientific method is a better way to determine what is true about economic activity than any alternative method, and that knowing what is true is valuable.

In conversations with economists who are sympathetic to the freshwater economists I singled out for criticism in my AEA paper on mathiness, it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form “we ought to behave like scientists.”

In a series of three posts that summarize what I have learned since publishing that paper, I will try to stick to positive assertions, that is assertions about the facts, concerning this difference between the premises that freshwater economists take for granted and the premises that I and other economists take for granted.

In my conversations, the freshwater sympathizers generally have not disagreed with my characterization of the facts in assertion #1–that specific freshwater economists did X. In their response, two themes recur:

a) Yes, but everybody does X; that is how the adversarial method works. b) By selectively expressing disapproval of this behavior by the freshwater economists that you name, you, Paul, are doing something wrong because you are helping “those guys.”

In the rest of this post, I’ll address response a). In a subsequent post, I’ll address response b). Then in a third post, I’ll observe that in my AEA paper, I also criticized a paper by Piketty and Zucman, who are not freshwater economists. The response I heard back from them was very different from the response from the freshwater economists. In short, Piketty and Zucman disagreed with my statement that they did X, but they did not dispute my assertion that X would be wrong because it would be a violation of the scientific method.

Together, the evidence I summarize in these three posts suggests that freshwater economists differ sharply from other economists. This evidence strengthens my belief that the fundamental divide here is between the norms of political discourse and the norms of scientific discourse. Lawyers and politicians both engage in a version of the adversarial method, but they differ in another crucial way. In the suggestive terminology introduced by Jon Haidt in his book The Righteous Mind, lawyers are selfish, but politicians are groupish. What is distinctive about the freshwater economists is that their groupishness depends on a narrow definition of group that sharply separates them from all other economists. One unfortunate result of this narrow groupishness may be that the freshwater economists do not know the facts about how most economists actually behave. ...[continue]...

Tight fiscal policy by local, state, and federal governments held down economic growth for more than four years, but that restraint finally appears to be over...

This is a pretty good summary of the charts:

Fiscal policy is no longer a source of contraction for the economy, but neither is it a source of strength.

But in my view the statement "neither is it a source of strength" understates how poorly fiscal policy has been managed. The strong headwinds never should have been there to begin with, and we have yet to feel the wind at our backs:

Martin Feldstein says that when it comes to income inequality, you're all a bunch of whiners:

...we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains..., the US middle class has been doing much better than the statistical pessimists assert. ...

So it's yet another another round of "inequality has not grown as much as Democrats claim." Thought we had gotten beyond that. Today's news:

U.S. wages and benefits grew in the spring at the slowest pace in 33 years, stark evidence that stronger hiring isn't lifting paychecks much for most Americans. The slowdown also likely reflects a sharp drop-off in bonus and incentive pay for some workers.

The employment cost index rose just 0.2 percent in the April-June quarter after a 0.7 increase in the first quarter, the Labor Department said Friday. The index tracks wages, salaries and benefits. Wages and salaries alone also rose 0.2 percent.

Both measures recorded the smallest quarterly gains since the second quarter of 1982.

Salaries and benefits for private sector workers were unchanged, the weakest showing since the government began tracking the data in 1980. ...

The employment cost index figures now match the sluggish pace of growth reported in the average hourly pay data that's part of the monthly jobs report. ...

What can we learn from the response of the Chinese government to the problems in China's stock market?:

China’s Naked Emperors, by Paul Krugman, Commentary, NY Times: ... We’ve seen ... strange goings-on in China’s stock market. In and of itself, the price of Chinese equities shouldn’t matter all that much. But the authorities have chosen to put their credibility on the line by trying to control that market — and are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing. ...

China is at the end of an era — the era of superfast growth... Meanwhile, China’s leaders appear to be terrified — probably for political reasons — by the prospect of even a brief recession. ... China’s response has been an all-out effort to prop up stock prices. Large shareholders have been blocked from selling; state-run institutions have been told to buy shares; many companies with falling prices have been allowed to suspend trading. ...

What do Chinese authorities think they’re doing?

In part, they may be worried about financial fallout. It seems that a number of players in China borrowed large sums with stocks as security, so that the market’s plunge could lead to defaults. This is especially troubling because China has a huge “shadow banking” sector that is essentially unregulated and could easily experience a wave of bank runs.

But it also looks as if the Chinese government, having encouraged citizens to buy stocks, now feels that it must defend stock prices to preserve its reputation. And what it’s ending up doing, of course, is shredding that reputation at record speed.

Indeed, every time you think the authorities have done everything possible to destroy their credibility, they top themselves. Lately state-run media have been assigning blame for the stock plunge to, you guessed it, a foreign conspiracy against China, which is even less plausible than you may think: China has long maintained controls that effectively shut foreigners out of its stock market, and it’s hard to sell off assets you were never allowed to own in the first place.

So what have we just learned? China’s incredible growth wasn’t a mirage, and its economy remains a productive powerhouse. The problems of transition to lower growth are obviously major, but we’ve known that for a while. The big news here isn’t about the Chinese economy; it’s about China’s leaders. Forget everything you’ve heard about their brilliance and foresightedness. Judging by their current flailing, they have no clue what they’re doing.

Thursday, July 30, 2015

GDP Report, by Tim Duy: The second quarter GDP report, while not a blockbuster by any measure, will nudge the Fed further in the direction of a September rate hike. At first blush this might seem preposterous - 2.3% growth is nothing to write home about in comparison to history. But history is deceiving in this case. It remains important to keep in mind that 2% is the new 4%.

Year-over-year growth rates continue to hover around 2.5%:

While the 2.3% quarterly rate of the second quarter was below consensus forecasts, the first quarter figure was revised up from -0.2% to 0.6%. That said, the annual revisions from 2012-2014 disappointed. Average annual growth from 2011 to 2014 dropped from a previsouly reported 2.3% to 2.0%. Sad, very sad.

That was still enough growth, however, to sustain fairly solid job growth and sharp declines in the unemployment rate, suggesting that potential output growth is indeed fairly anemic. The Fed staff appear to agree; see their very low potential growth numbers in the accidentally released forecasts (and for more on the implications of those forecasts, see Gavin Davies). Note also the low end of the range of potential growth estimates from FOMC meeting participants is 1.8%. Furthermore, San Francisco Federal Reserve President John Williams wants the Fed to guide the economy to a 2.0% growth rate in 2016. Hence 2.3% growth when the economy is operating near full-employment is sufficient for many policymakers to pull the trigger on the first rate hike.

A second implication of the revisions is that they provide no relief for those pondering low productivity growth. Indeed, it is quite the opposite, and they suggest downward revisions to productivity. Low productivity plus low labor force growth equals low potential output growth. 2% is the new 4%. And don't expect that all the data will fall into the same nice, consistent patterns we typically see in a business cycle. Some indicators will point up, others down, leading to many erroneous calls that a recession is soon upon us.

As an aside, solid research and development spending gives hope that productivity growth will accelerate:

We can only wait and see.

The inflation numbers also point to a September hike. Recall that the Fed is waiting until they are reasonably confident that inflation is heading back to target. Headline and core PCE rebounded to 2.15% and 1.81% annual growth rates in the first quarter, respectively, adding weight to the Fed's conviction that the inflation weakness of the first half was indeed transitory. To be sure, these gains have yet to translate into higher year-over-year numbers. But a forward looking Fed will expect they will head higher.

Separately, the forward-looking indicator of initial unemployment claims continues to hover at very low levels:

A reminder that layoffs are few and far between as we head into next week's employment report for July.

Bottom Line: An unspectacular recovery, but sufficient to keep the Fed on track for raising rates this year. The case for September further strengthens.

Dentists and Skin in the Game: Wonkblog has a post inspired by the dentist who paid a lot of money to shoot Cecil the lion, asking why he — and dentists in general — make so much money. Interesting stuff; I’ve never really thought about the economics of dental care.

But once you do focus on that issue, it turns out to have an important implication — namely, that the ruling theory behind conservative notions of health reform is completely wrong.

For many years conservatives have insisted that the problem with health costs is that we don’t treat health care like an ordinary consumer good; people have insurance, which means that they don’t have “skin in the game” that gives them an incentive to watch costs. So what we need is “consumer-driven” health care, in which insurers no longer pay for routine expenses like visits to the doctor’s office, and in which everyone shops around for the best deals. ...

As it turns out, many fewer people have dental insurance than have general medical insurance; even where there is insurance, it typically leaves a lot of skin in the game. But dental costs have risen just as fast as overall health spending...

The Commerce Department reported the economy grew at a 2.3 percent annual rate in the second quarter, a substantial improvement from the 0.6 percent rate in the first quarter. The latter number was an upward revision from a previously reported decline of -0.2 percent. The biggest factors were a turnaround in the trade balance and an uptick in the rate of consumption growth.

In the first quarter, exports fell at a 6.3 percent annual rate. This was partly the result of the rise in the value of the dollar in 2014, but also partly the result of slowdowns at West Coast ports due to a labor dispute. With the labor dispute now settled, exports rose at a 5.3 percent rate in the second quarter, still leaving them below their level from the fourth quarter of 2014. The improvement in the trade balance contributed 0.13 percentage points to growth after subtracting 1.92 percentage points in the first quarter.

Consumption grew at a 2.9 percent annual rate in the second quarter, up from a weather-depressed 1.1 percent rate in the first quarter. The biggest change was in durable goods. People who put off buying cars in the harsh winter weather instead bought in the second quarter, leading to a 7.3 percent rate of increase in durable good sales compared to a 2.0 percent rate in the first quarter. Consumption contributed 1.99 percentage points to growth in the second quarter compared to 1.19 percentage points in the first quarter.

The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014. This should end speculation about why people are not spending their dividend from lower gas prices, since the data indicate they are. Consumption is at near-record highs as a share of GDP, which makes the frequent fretting over cautious consumers seem more than a bit peculiar.

Investment was very weak in the quarter, shrinking at a 0.6 percent annual rate. Equipment spending fell at a 4.1 percent rate, and spending on structures fell at a 1.6 percent rate after dropping at a 7.4 percent rate in Q1. It is likely that overbuilding in some areas will lead to further weakening of structure investment in future quarters. Residential construction grew at a 6.6 percent rate, down from a 10.1 percent rate in the first quarter. Government spending rose at a 0.8 percent rate as a 2.0 percent rise in state and local spending more than offset a drop of 1.1 percent at the federal level.

The revisions show the recovery to have been weaker than previously reported. Growth for the years 2012–14 averaged just 2.0 percent, down from a previously reported 2.3 percent. This means the economy was growing less rapidly than most estimates of potential GDP growth, implying the economy was falling further below its potential level of output during this period instead of making up the ground lost during the recession.

The revised data also show a somewhat smaller profit share in the last two years. Before-tax profits were revised down by $69.5 billion (3.3 percent) in 2013 and $16.9 billion (0.8 percent) in 2014. With these revisions, the profit share of corporate income peaked in 2012 and has been drifting downward for the last two years.

The data on health care spending continue to look very good. Spending on health care services, which accounts for the vast majority of health care spending, rose at a 2.7 percent annual rate in the quarter, virtually the same as the rate over the last three years. Spending on drugs has been rising considerably more rapidly. Inflation continues to be very much under control. Over the last year, the core personal consumption expenditure (PCE) has risen by 1.3 percent, well below the Fed’s 2.0 percent target.

On the whole, this report suggests that the economy is likely to continue to grow at a very modest pace. Consumption growth will likely be slower in the second half of the year, with investment likely to be somewhat stronger. The net is likely to lead to a growth rate of close to 2.0 percent. If it had not been for extraordinarily weak productivity growth, this would imply a very slow rate of job creation.

Wednesday, July 29, 2015

FOMC Recap, by Tim Duy: The July FOMC meeting yielded the widely expected outcome of no policy change. Very little change in the statement either - pulling out any useful information is about as easy as reading tea leaves or chicken bones. But that won't stop me from trying! On net, I would count it was somewhat more hawkish as the Fed gears up to hike rates later this year. By no means, however, did the statement make any definitive signal about September. The Fed continues to hold true to its promise to make the next move about the data. The era of handholding fades further into memory.

The first paragraph contained nearly all of the changes in the statement. Using the Wall Street Journal's handy-dandy Fed tracker:

In my opinion, this represents a not trivial upgrade of their thoughts on the labor market. Job growth is "solid," unemployment continues to decline, and a much more forceful conclusion on underemployment. No longer has underutilization diminished by a wishy-washy "somewhat." It now conclusively "has" diminished. Hence, it seems like the Fed is closer to declaring victory over one impediment to hiking rates - Fed Chair Janet Yellen's concerns about the high degree of underemployment.

I tend to regard the exclusion of the "energy prices appear to have stabilized" as the elimination of an artifact from the June statement. Energy prices are not in free-fall as the were at the end of last year, and have instead been tracking within a range since the beginning of the year. Hence the Fed can later repeat the inflation forecast as:

"...the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate."

Some may interpret it as a more dovish signal in light of the recent declines in oil prices. I am wary of that interpretation.

The only other change to the statement was in the third paragraph:

The addition of the determiner "some" fits nicely with the changes to the first paragraph. The labor market has now shown sufficient improvement such that the bar to a rate hike is actually quite low. Essentially, meeting participants believe the economy is closing in on full employment. And that in and of itself will raise their confidence on the inflation outlook.

There was some early chatter regarding the continued description of the risks to the outlook as "nearly" balanced. This was taken as dovish. Had they said the balance is weighted toward inflation, however, the Fed would have essentially been promising a rate hike in September, and they have been very clear they do not want to make such a promise. So the failure to change the balance of risks should not be that surprising. In that vein, I suspect that when they do hike, they will say something like "with today's action, the risks to the outlook remain balanced" such that they leave no signal regarding the timing or the magnitude of the next move.

Bottom Line: All else equal, the next two labor reports will factor strongly into the Fed's decision in September. A continuation of recent labor trends is likely sufficient to induce them to pull the trigger. Further signs of stronger wage growth would make a September move a certainty.

What Is “Price Theory”?: ... I have an unusual relationship to “price theory”. As far as I know I am the only economist under 40, with the possible exception of my students, who openly identifies myself as focusing my research on price theory. As a result I am constantly asked what the phrase means. Usually colleagues will follow up with their own proposed definitions. My wife even remembers finding me at our wedding reception in a heated debate not about the meaning of marriage, but of price theory.

The most common definition, which emphasizes the connection to Chicago and to models of price-taking in partial equilibrium, doesn’t describe the work of the many prominent economists today who are closely identified with price theory but who are not at Chicago and study a range of different models. It also falls short of describing work by those like Paul Samuelson who were thought of as working on price theory in their time even by rivals like Milton Friedman. Worst of all it consigns price theory to a particular historical period in economic thought and place, making it less relevant to the future of economics.

I therefore have spent many years searching for a definition that I believe works... This process eventually brought me to my own definition of price theory as analysis that reduces rich (e.g. high-dimensional heterogeneity, many individuals) and often incompletely specified models into ‘prices’ sufficient to characterize approximate solutions to simple (e.g. one-dimensional policy) allocative problems. This approach contrasts both with work that tries to completely solve simple models (e.g. game theory) and empirical work that takes measurement of facts as prior to theory. Unlike other definitions, I argue that mine does a good job connecting the use of price theory across a range of fields of microeconomics from international trade to market design, being consistent across history and suggesting productive directions for future research on the topic. ...

Not much to say about this, policy is unchanged, and not as much guidance on what to expect going forward as some expected (i.e., to get people ready for a rate increase in September):

Press Release, Release Date: July 29, 2015: Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

In two posts, here and here, Tim Johnson notes that two government investigations (one in the UK, the other in the US) tell a different tale. People in finance used math to hide what they were doing.

One of the premises I used to take for granted was that an argument presented using math would be more precise than the corresponding argument presented using words. Under this model, words from natural language are more flexible than math. They let us refer to concepts we do not yet fully understand. They are like rough prototypes. Then as our understanding grows, we use math to give words more precise definitions and meanings. ...

I assumed that because I was trying to use math to reason more precisely and to communicate more clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse a reader, but I assumed that all of us who used math operated in a reputational equilibrium where obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math to clarify and lend precision.

Unfortunately, I was wrong even about the equilibrium in the academic world, where mathiness is in fact used to obfuscate. In the world of for-profit finance, the return to obfuscation in communication with regulators is much higher, so there is every reason to expect that mathiness would be used liberally, particularly in mandated disclosures. ...

We should expect that there will be mistakes in math, just as there are mistakes in computer code. We should also expect some inaccuracies in the verbal claims about what the math says. A small number of errors of either type should not be a cause for alarm, particularly if the math is presented transparently so that readers can check the math itself and check whether it aligns with the words. In contrast, either opaque math or ambiguous verbal statements about the math should be grounds for suspicion. ...

In 1999, Alan Greenspan, then Chairman of the Federal Reserve System, argued that stock markets could mitigate the negative effects of banking crises, including more fragile businesses and greater unemployment. Using the analogy of a spare tire, he conjectured that banking crises in Japan and East Asia would have been less severe if those countries had built the necessary legal infrastructure so that their stock markets could have provided financing to corporations when their banking systems could not. If firms can substitute equity issuances for bank loans during banking crises, then banking crises will have less harmful effects on the public.

But researchers have not evaluated the spare tire view. Although official entities and others discuss the spare tire argument (e.g. US Financial Crisis Inquiry Commission 2011, Wessel 2009), we are unaware of systematic assessments of the testable implications emerging from Greenspan’s view of how financial markets can ease the effects of systemic banking failures.

In a recent paper, we provide the first assessment of the spare tire view... The findings are consistent with the three predictions of the spare tire view. ... The estimated economic effects are large...

Paul Krugman wonders if he has been advocating for the right type of policies:

Second-best Macroeconomics: The ... economic problems facing both the United States and Europe have been quite straightforward and comprehensible. ... So no worries: just hit the big macroeconomic That Was Easy button, and soon the troubles will be over.

Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.

As a result, we’re stuck with highly problematic second-best policies like quantitative easing and internal devaluation. ... In case you don’t know, “second best” ... comes from a classic 1956 paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors. ...

The problems with second best as a policy rationale are familiar. For one thing, it’s always better to address existing distortions directly, if you can — second best policies generally have undesirable side effects... There’s also a political economy concern,... in a complicated world you can come up with a second best rationale for practically anything. ...

But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice, and the distortions we’re trying to correct are huge — one global depression can ruin your whole day. So we have quantitative easing, which is of uncertain effectiveness, probably distorts financial markets at least a bit, and gets trashed all the time by people stressing its real or presumed faults; someone like me is then put in the position of having to defend a policy I would never have chosen if there seemed to be a viable alternative. ...

Which makes me ask myself the question: Do people like me spend too much time being limited by what is presumed to be politically practical? Should we devote more time to trying to widen the range of options, to pointing out that we really would be much better off if we threw off the fetters of conventional deficit fears, the 2 percent inflation target, and the extremely ill-advised euro project?

Tuesday, July 28, 2015

The Politics of Economics and ‘Very Serious People’: The latest debate in the economics blogosphere is about the true meaning of the term “Very Serious People,” a term of derision initially used to describe some supporters of the Iraq war. It was later broadened to describe people who advocate for the tough position on any issue – budget cuts and entitlement reform to ease debt worries, increases in interest rates to prevent inflation, and so on – despite evidence contrary to their policy proposals.

Very Serious People often embrace unpopular policies; they adopt the tough and serious route they believe is needed to ensure the US remains on solid footing, and they ridicule the opposition as softies unwilling to accept that there is no easy way to overcome our economic problems. Gain requires pain, but we should note that the tough policies Very Serious People embrace usually impose the pain on other people -- often the poor and disadvantaged. When they are asked to step up and pay more taxes to reduce the deficit, for example, their tune generally changes.

Henry Farrell, an Associate Professor of Political Science at George Washington University says, “Being a Very Serious Person is about occupying a structural position that tends to reinforce, rather than counter, one’s innate biases and prejudices.” I’m not sure that fully captures the desire to appear tough and disciplined, to be seen as the one willing to say what needs to be done no matter how hard it is, but it did lead me to think about the degree to which I, and other economists, are influenced by our political leanings. To what extent do our politics determine our economics? ...

Simon Wren-Lewis on whether "central bankers need to keep quiet about policy matters that are not within their remit":

Should central bankers stick to talking about monetary policy?: Few disagree that the recent remarks on corporate governance and investment made by Andy Haldane (Chief Economist at the Bank of England) are interesting, and that if they start a debate on short-termism that would be a good thing. As Will Hutton notes, Hillary Clinton has been saying similar things in the US. The problem Tony Yates has (and which Duncan Weldon, the interviewer, alluded to in his follow-up question) is that this is not obviously part of the monetary policy remit.

Haldane gave an answer to that, which Tony correctly points out is somewhat strained. ...

I have in the past said very similar things to Tony...

However I am beginning to have second thoughts about my own and Tony’s views on this. First, it all seems a bit British in tone. Tony worked at the Bank, and I have been involved with both the Bank and Treasury on and off, so we are both steeped in a British culture of secrecy. I do not think either of us are suggesting that senior Bank officials should never give advice to politicians, so what are the virtues of keeping this private? In trying to analyse how policy was made in 2010, it is useful to have a pretty good idea of what advice the Bank’s governor gave politicians because of what he said in public, rather than having to guess. ...

It is often said that central bankers need to keep quiet about policy matters that are not within their remit as part of an implicit quid pro quo with politicians, so that politicians will refrain from making public their views about monetary policy. Putting aside the fact that the ECB never got this memo, I wonder whether this is just a fiction so that politicians can inhibit central bankers from saying things politicians might find awkward (like fiscal austerity is making our life difficult). In a country like the UK with a well established independent central bank, it is not that clear what the central bank is getting out of this quid pro quo. And if it stops someone with the wide ranging vision of Haldane from raising issues just because they could be deemed political, you have to wonder whether this mutual public inhibition serves the social good.

The danger is that the Fed will become politicized as a result of taking sides on hotly debated political/policy questions. This is from a post in February of 2007:

...Should the Federal Reserve Chair talk only about matters directly related to monetary policy, or is it okay to discuss broader issues such as inequality, minimum wages, and Social Security without making the direct connection to monetary policy evident?...:

Willem Buiter: Martin's Column "Why America will need some elements of a welfare state", refers extensively to a recent speech by Ben Bernanke...

I believe it is a serious mistake for central bankers to express public views on politically contentious issues outside their mandates. The mistake is no less serious for being made so commonly by central bankers all over the world.

Central bank Governors have a lengthy and unfortunate track record of holding forth in public on matters that are outside the domains of their mandate (in the case of the Fed, monetary policy and financial stability)... With the exception of the Governors of the Bank of England and the Reserve Bank of New Zealand, every Governor on the block appears to want to share his or her views on necessary or desirable fiscal, structural and social reforms. Examples are social security reform and the minimum wage, subjects on which Alan Greenspan liked to pontificate when he was Chairman of the Board of Governors of the Federal Reserve System. Jean-Claude Trichet cannot open his mouth without some exhortation for fiscal restraint or structural reform rolling out. In the case of Chairman Bernanke's speech, equality of opportunity, income distribution, teenage pregnancy and welfare dependency are clearly not part of the (admittedly broad) three-headed mandate of the Fed: maximum employment, stable prices and moderate long-term interest rates. ...

When the Head of a central bank becomes a participant, often a partisan participant, in public policy debates on matters beyond the central bank's mandate..., the institution of the central bank itself is politicised and put at risk of becoming a partisan-political football. This puts at risk the central bank's operational independence in the management of monetary policy and in securing financial stability.

Central bankers, Mr. Bernanke included, should 'stick to their knitting' (if I may borrow Alan Blinder's phrase). Being the head of an institution with the national and global visibility of the Fed or the ECB gives one an unparalleled platform for addressing whatever one considers the great issues of the time. The temptation to climb that unique pulpit must be near-irresistible. Nevertheless, unless the text for the sermon concerns monetary policy or financial stability, that temptation is to be resisted in the interest of the institutional integrity and independence of the central bank.

Fiscal policy has a clear connection to monetary policy through the government budget constraint, and there are also times -- e.g. recently -- when monetary policy needs the help of fiscal policy (if the Fed is forced to shoulder the entire burden, it can bring other risks). So I have no problem with the Fed chair raising fiscal policy issues (as Bernanke did, though not forcefully enough perhaps). I have a bit more trouble when the topic is inequality (e.g. Yellen's big speech on this -- and the subsequent reaction from the right). It's harder to see how that is connected to the Fed's policy mandate, and with Republicans already out to take away as much of the Fed's powers as they can, it was a bad time to tick them off.

Maybe this is too cautious. Perhaps Federal Reserve officials should feel free to address whatever topic they'd like. But the Fed's independence was instrumental during the Great Recession -- without it, monetary policy would have been as terrible as fiscal policy and things would have been much worse -- and I'd rather not take any risks.

These new platforms consolidate content from multiple sources into one place, thereby lowering the transactions costs of obtaining content and introducing new information to consumers. ... For these reasons, platforms have attracted considerable legal and policy attention. ...

Our results indicate that ... the traffic effect is large, as aggregators may guide users to new content. We do not find evidence of a scanning effect...

Our empirical distinction between a scanning effect where the aggregator substitutes for original content and a traffic effect where the aggregator is complementary, is useful for analyzing the potential policy implications of such business models. The fact we find evidence of a "traffic effect" even with a relatively large amount of content on an aggregator, is perhaps evidence that the "fair use" exemptions often relied on by such sites are less potentially damaging to the original copyright holder than often thought.

On the comment that the benefits outweigh the harm "even with a relatively large amount of content on an aggregator," when I post an entire article, as I did yesterday with this Vox EU piece, a surprisingly high percentage of you still click through to the original.

With video, at least in most cases, there is code available to put the video on your site. You play it and it has ads, branding, etc. I've always thought (or maybe hoped) content providers should do the same thing. Provide an embed button that allows me to duplicate an article -- it would come with ads, links to other content on their site, etc. -- on my site. Reads of the article would go way up (not from just my site, I mean if they allowed everyone to do this), and it would increase the number of people who see ads associated with their content (so they could charge more).

Are we overestimating inflation (again?): Twenty years ago, a group of experts – the “Boskin Commission” – concluded that the U.S. consumer price index (CPI) systematically overstated inflation by 0.8 to 1.6 percentage points each year. Taking these findings to heart, the Bureau of Labor Statistics (BLS) got to work reducing this bias, so that by the mid-2000s, experts felt it had fallen by as much as half a percentage point.

We bring this up because there is a concern that as a consequence of the way in which we measure information technology (IT), health care, digital content and the like, the degree to which conventional indices overestimate inflation may have risen. ...

When indices like the consumer price index (CPI) or the personal consumption expenditure price index (PCE) persistently overstate inflation, there are important consequences. So long as the upward bias is constant, central bankers can (and do) modify their inflation targets. Yet, these price indexes also are used to adjust entitlement benefits without correcting for any persistent bias. And, they can have an important impact on public discourse. In particular, upward bias means that the median real wage may have risen substantially over past decades, in contrast to reported stagnation.

If the overstatement of inflation has increased during the past decade, this also has profound consequences. For one thing, the reported slowdown in annual productivity growth – from something like 2½% in the decade prior to the crisis to about 1% today – could be more apparent than real. For another, true inflation may be even further below the Federal Reserve’s long-run objective of 2% on the PCE than current readings imply.

There is good reason to think that the price mismeasurement problem has gotten worse, but quantifying that deterioration is another thing. The impact on inflation may turn out to be small – perhaps an extra ¼% annually – leaving it well within the range of uncertainty that the Boskin Commission highlighted 20 years ago. ...

After presenting their analysis, they end with:

So, what’s the bottom line? We have little doubt that inflation has been overstated for decades. That means that the rise of U.S. real output, real income, productivity, and living standards has been understated materially over the long run. In recent years, IT price mismeasurement probably has worsened this growth and productivity bias significantly. But the potential impact of IT mismeasurement on measures of consumer price inflation – which has been the source of much discussion – is small compared to what a worsening bias in health care prices would imply.

But the right has never abandoned its dream of killing the program. So it’s really no surprise that Jeb Bush recently declared that while he wants to let those already on Medicare keep their benefits, “We need to figure out a way to phase out this program for others.” ...

The ... reason conservatives want to do away with Medicare has always been political: It’s the very idea of the government providing a universal safety net that they hate, and they hate it even more when such programs are successful. But ... they usually shy away from making their real case...

What Medicare’s would-be killers usually argue, instead, is that the program as we know it is unaffordable — that we must destroy the system in order to save it... And the new system they usually advocate is ... vouchers that can be applied to the purchase of private insurance.

The underlying premise here is that Medicare as we know it is incapable of controlling costs, that only the only way to keep health care affordable going forward is to rely on the magic of privatization.

Now, this was always a dubious claim. .... In fact, Medicare costs per beneficiary have consistently grown more slowly than private insurance premiums... Indeed, Medicare spending keeps coming in ever further below expectations...

Right now is, in other words, a very odd time to be going on about the impossibility of preserving Medicare, a program whose finances will be strained by an aging population but no longer look disastrous. One can only guess that Mr. Bush is unaware of all this, that he’s living inside the conservative information bubble, whose impervious shield blocks all positive news about health reform.

Meanwhile, what the rest of us need to know is that Medicare at 50 still looks very good. It needs to keep working on costs, it will need some additional resources, but it looks eminently sustainable. The only real threat it faces is that of attack by right-wing zombies.

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, NBER Working Paper No. 21409 Issued in July 2015: Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three (most of them for little or no economic gain), and taxes increased rapidly but not enough to keep pace with the rise in spending.

Figure 1 shows how war drove up spending and led to massive debt accumulation – the shaded grey areas indicate wars, and they are responsible for almost all of the rise in debt. Over the same period, Britain moved a large part of its population out of agriculture and into industry and services – out of the countryside and into cities. Population grew rapidly, and industrial output surged (Crafts 1985). As a result, Britain became the first country to break free from the shackles of the Malthusian regime.

Figure 1. Debt accumulation and government expenditure in the UK, 1690-1860

Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative. One prominent view held that investment in private industry would have been higher had Britain fought and borrowed less (Williamson 1984). Another argument is that private savings decisions undid the potentially negative effects of massive borrowing – because debt eventually has to be repaid, private agents anticipated rising taxes in the future and neutralized the effects of debt accumulation (Barro 1990).

The revolution that wasn’t

In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015). To understand why massive debt accumulation may have accelerated the Industrial Revolution, we first consider what should have happened in an economy where entrepreneurs suddenly start to exploit a new technology with high returns. Typically, we would expect capital to chase these investment opportunities – anyone with money should have tried to put their savings into new cotton factories, iron foundries and ceramics manufacturers. Where they didn’t have the expertise to invest directly, banks and stock companies should have recycled funds to direct savings to where returns where highest.

This is not what happened. Financial intermediation was woefully inadequate – it failed to send the money where it should have gone. As one prominent historian of the British Industrial Revolution argued:

“the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of [Britain’s] wealth found its way into the new industrial enterprises ….” (Postan 1935).

There were many reasons for this, but deliberate financial repression by the government was one of them. Usury limits, the Bubble Act, the Six Partner Rule that limited the size of banks – all of them were designed to stifle private intermediation, in part so as to facilitate access to funds for the government (Temin and Voth 2013).

Without effective intermediation, new sectors had to self-finance – rates of return stayed high because so little fresh capital entered to chase the sky-high returns. Allen calculated that the profit rate for capital rose from 10% in the 1770s to over 20% by the 1830s – capital’s share of national income more than doubled (Allen 2009).

Why debt helped

The inefficiency of private intermediation is crucial for debt to play a beneficial role. By issuing bonds on a massive scale, the government effectively pioneered a way – unintentionally – to put money in the pockets of entrepreneurs in the new sectors.

How did it do that? Before the availability of government debt, Britain’s rich and mighty – the nobility – overwhelmingly invested in land and land improvements. Status was closely tied to land, but improving it was not a profitable enterprise. Many forms of investment yielded a return of 2% of less. No wonder that noblemen were disenchanted with landed investment: By the 1750s, the first nobles were switching massively out of land and into government debt. The Prime Minister Sir Robert Peel advised: “every landowner ought to have as much property (as his estate) in consols or other securities…” (Habbakuk 1994). Many nobles obliged, shifting into an asset with a superior risk-return profile. As Lord Monson put it: “What an infernal bore is landed property. No certain income can be reckoned upon. I hope your future wife will have consols. . . ” (Thompson 1963).

The shift from investing in liming, marling, draining, and enclosure into government debt liberated resources – labor that could no longer be profitably employed in the countryside had to look for employment elsewhere. Because so much of English agricultural labor was provided by wage laborers, the switch to government debt pushed workers off the land. Unsurprisingly, wages failed to keep pace with output; real wages, adjusted for urban disamenities, probably fell over the period 1750-1830. What made life miserable for the workers, as eloquently described by Engels amongst others, was a boon to the capitalists. Their profit rates continued to rise as capital received an ever-larger share of the pie – while the share of national income going to labor and land contracted. Higher profits spelled more investment in new industries, and Britain’s industrial growth accelerated.

By putting debt at the center of our interpretation of the Industrial Revolution, we can provide a unified explanation for a number of features that have so far seemed puzzling. Growth was relatively slow, especially in the beginning (Crafts 1985) – but technological change was probably quite rapid (Temin 1997). Government borrowing slowed capital formation on impact – but structural change was rapid over the period as a whole. Rates of return were high in industry, but little capital chased these returns. Wages failed to keep up with productivity despite the rapid move out of the countryside and into the cities. By emphasizing how government debt issuance ‘healed’ the negative consequences of financial frictions, we can jointly explain rapid structural change and slow growth; rapid technological change and poor wage growth; massive government borrowing and the first take-off into sustained growth.

Good-bye to Downton

The issuance of government debt also accelerated social change – the rise of the capitalists and the decline of nobility. Without it, rates of profit in industry would have been less, and the decline and fall of the nobility as a dominant economic force would have taken much longer.

The solution that would have ensured the fastest growth – a much better financial system – would have preserved England’s social hierarchy entirely. Financial investment from the nobility would have flowed into new sectors via banks and the stock market, allowing the top 1% to earn high returns. The rise of the capitalists would have been long-delayed or been avoided altogether.

The bigger picture

How much of the situation in industrializing England has any relevance for the world as it is now? Is this a tale from a distant island and period of which we know little – to paraphrase Chamberlain – or does it hold lessons for the present? Financial frictions are still very prominent even in the most developed countries today; changing the profitability of revolutionary sectors should have first-order effects on the long-run rate of growth. The issuance of government debt may still crowd out investment that is, overall, inefficient.

These efficiency-enhancing effects of government debt may be all the more important in developing countries. There, the added benefits of debt that we did not discuss – such as providing a safe store of value, and a certain source of liquidity (Holmstrom and Tirole 1998) – may tilt the overall scoresheet even more in favor of government borrowing. None of this is to say that debts may not become excessive (Reinhart and Rogoff 2009) – but when we consider the dangers of debt, we should keep an eye on its potential benefits as well.

References

Allen, R (2009), “Engel’s pause: A pessimist’s guide to the British Industrial Revolution”, Explorations in Economic History 46 (2): 418–35.

Sunday, July 26, 2015

The F story about the Great Inflation: Here F could stand for folk. The story that is often told by economists to their students goes as follows. After Phillips discovered his curve, which relates inflation to unemployment, Samuelson and Solow in 1960 suggested this implied a trade-off that policymakers could use. They could permanently have a bit less unemployment at the cost of a bit more inflation. Policymakers took up that option, but then could not understand why inflation didn’t just go up a bit, but kept on going up and up. Along came Milton Friedman to the rescue, who in a 1968 presidential address argued that inflation also depended on inflation expectations, which meant the long run Phillips curve was vertical and there was no permanent inflation unemployment trade-off. Policymakers then saw the light, and the steady rise in inflation seen in the 1960s and 1970s came to an end.

This is a neat little story, particularly if you like the idea that all great macroeconomic disasters stem from errors in mainstream macroeconomics. However even a half awake student should spot one small difficulty with this tale. Why did it take over 10 years for Friedman’s wisdom to be adopted by policymakers, while Samuelson and Solow’s alleged mistake seems to have been adopted quickly? Even if you think that the inflation problem only really started in the 1970s that imparts a 10 year lag into the knowledge transmission mechanism, which is a little strange.

However none of that matters, because this folk story is simply untrue. There has been some discussion of this in blogs (by Robert Waldmann in particular - see Mark Thoma here), and the best source on this is another F: James Forder. There are papers (e.g. here), but the most comprehensive source is now his book, which presents an exhaustive study of this folk story. It is, he argues, untrue in every respect. Not only did Samuelson and Solow not argue that there was a permanent inflation unemployment trade-off that policymakers could exploit, policymakers never believed there was such a trade-off. So how did this folk story arise? Quite simply from another F: Friedman himself, in his Nobel Prize lecture in 1977.

Forder discusses much else in his book, including the extent to which Friedman’s 1968 emphasis on the importance of expectations was particularly original (it wasn’t). He also describes how and why he thinks Friedman’s story became so embedded that it became folklore....

Of the 27 economic factors, two stand out as having the largest effects. First is the increase in restaurants per capita, which explains 12%, 14%, and 23% of the increases in BMI, obesity, and severe obesity, respectively. Increased availability of restaurant food would likely encourage substitution away from home-cooked meals to relatively unhealthy restaurant meals. Furthermore, fast food is not the lone culprit. When we split the restaurant variable into fast-food and full-service restaurants, we find similar effects for each type.

The second major contributor is the increase in superstores and warehouse clubs per capita, which accounts for 17%, 16%, and 24% of the growth in body mass index, obesity, and severe obesity. The superstore variable combines Walmart Supercenters with the warehouse club chains Costco, Sam’s Club, and BJ’s Wholesale Club. A possible explanation for the impact of these stores on obesity is that they sell food at discounts of around 20% relative to traditional grocers. Alternatively, buying food in bulk at warehouse clubs could contribute to overeating. However, when decomposing the superstore variable, Walmart Supercenters are found to have roughly the same effect as warehouse clubs. Since Walmart Supercenters sell food in traditional package sizes, this reduces the likelihood that bulk buying is a primary explanation.

This analysis suggests that variables related to the costs of eating – particularly Supercenter/warehouse club expansion and increasing numbers of restaurants – are leading drivers of the rise in obesity occurring since the early 1980s. However, the source of these effects remains somewhat uncertain. One possibility, previously discussed, is that they lower food prices, particularly for energy-dense food products and restaurant meals, so that the utility-maximising level of weight has increased. An alternative is that the expansion of Supercenters/warehouse clubs and restaurants has reduced time costs because of the greater availability of such foods. When combined with time-inconsistent preferences (i.e. the inability to follow through on previously made plans) this could lead to weight gains beyond utility-maximising levels. Consistent with this, we find that Supercenter/warehouse club densities are correlated with increases in weight loss attempts, which may reflect eating mistakes.

While restaurants, Supercenters, and warehouse clubs appear to have contributed substantially to the rise in obesity, this does not necessarily mean that they are bad for society. The increased availability and affordability of food brought about by these businesses undoubtedly have substantial benefits for consumers. However, such progress comes at a cost. Future research should investigate the reasons why restaurants and superstores contribute to obesity with the aim of helping policymakers develop appropriately targeted solutions.

The Old Man and the CPI: I don’t watch financial news, but CNBC was on in the gym, so I was treated to a long ad from Ron Paul, who wants you to buy his video explaining the coming crisis brought on by loose money. And I found myself thinking about the remarkable fact that there really are people who will buy that video.

After all, Ron Paul has been making the same prediction year after year — in fact, he’s been making this prediction at least since 1981! — and has been wrong year after year. It’s hard to think of a doctrine that has been as thoroughly refuted by events as goldbug economics. ...

The basic mindset of the kind of people who pay Ron Paul for his economic advice is pretty clear: they’ve made some money over the course of their lives, they believe that all of it reflects their own virtue, and they think they know from that experience what it takes to create wealth. They hear that the Fed is printing money, and it sounds to them like a violation of both the laws of economics and morality — and they surely think of it as a plot to take away their completely earned gains and give them to Those People (hence the whiteness issue).

You can try as hard as you like to tell such people that monetary policy is mainly a technical problem, that the Fed isn’t giving money away, and that predictions of runaway inflation have been utterly wrong; it will make no difference. You can point out that they would have done a much better job of investing if they had listened to the MIT gang; sorry, we’re just not their kind of people.

I’d say it’s sad, but I find it hard to feel much sympathy for the marks of this particular scam. Then again, that’s probably why they will never, ever listen to what I have to say.

LBJ signed the 1965 act,... the president noted, “our coinage of dimes, and quarters, and half dollars, and dollars have contained 90% silver.” Not any more: The new dimes and quarters would “contain no silver.” Instead they would be “composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper.” The new half dollar would have 80% silver on the outside and 19% silver inside.

... The value of the dollar started sinking after the 1965 coinage act, and by 1980 the dollar—so long valued at 0.77 ounces of silver—plunged to 0.02 ounces of silver. Today it is valued at 0.06 ounces of silver.

The pre-1965 silver coins have mostly disappeared from circulation. Misers who try to spend silver or gold coins they have hoarded are subject to a capital-gains tax. Monetary purists, incidentally, prefer to speak of “spending” gold and silver, rather than “selling” it, because gold and silver are the true constitutional money.

The U.S. Constitution prohibits states from coining money themselves or making anything but gold or silver coins legal tender. ...

A ... radical approach would be the Free Competition in Currency Act, originally the brainchild of Ron Paul, the former Texas congressman, and offered again in the last Congress by Rep. Paul Broun (R., Ga.). It adopts the idea of the late Nobel laureate Friedrich Hayek. This measure would end the legal tender laws, halt capital-gains taxation on gold and silver, and permit private coinage.

One important characteristic of a medium of exchange is that its supply can be controlled in way that allows shocks to the supply and demand for the medium of exchange to be offset. Otherwise, the value will potentially vary quite a bit over time. (E.g. the price of silver went from around $10 near the end of 1972 to over $100 at the beginning of 1980, followed by a large fall back to around $10 at the beginning of 1990. In 2001 it fell to around $6, then spiked to around $50 by 2011, then fell again to around $15 today, and all indications are that it will fall further.) Such large variations in purchasing power of the medium of exchange are highly undesirable -- this is what the gold and silver bugs object to, periods of rapid inflation and deflation (in addition to the variation in purchasing power, it creates considerably uncertainty about the future -- what will be the value of the medium of exchange when loans are repaid? -- and harms future investment).

One way to control the supply is to have it be essentially fixed, as with bitcoin, but that is not sufficient. As we've seen with bitcoin, variations in demand can have a huge impact on value. Similarly for precious metals. Supply can change with mining, etc., but it changes slowly, and variations in demand can lead to wildly fluctuating values. The solution is to have some central authority -- let's call if "the Fed" -- with the ability to alter the supply of the commodity quickly so as to keep the price stable.

So the choice is to have a medium of exchange whose value can vary significantly, suddenly and unexpectedly, or have a central authority intervene to stabilize the price (by stockpiling or selling the medium of exchange to offset shocks to the supply and demand for the commodity). The point is that if changes in the value of a medium of exchange is the concern, as it appears to be, then switching to a commodity money does not solve the problem of needing a central authority to keep the value stable.

V. Conclusion Many factors play roles in the determination of long - term interest rates, including the rate of productivity growth, beliefs about future risks, consumer preferences , demographic shifts , and the stance s of monetary and fiscal policy. As markets have become globally integrated, conditions in foreign markets are increasingly important for U . S . long - term interest rates. Over the past two decades, long - term interest rates have been falling worldwide. An explanation for why they are so low — and whether those low levels will persist — i s one of the most difficult questions facing macroeconomists today.

Interest rates are jointly determined by the supply of saving and the demand for investment. While it is difficult to make strong predictions, this report argues that there are a number of reasons to think that the global saving supply curve has shifted outward , a development that would help to keep equilibrium interest rates low . As with any price in the economy, a low price is beneficial to some and has negative ramifications for others. Low long - term interest rates make it cheaper for governments to finance their debt burdens. By reducing the cost of borrowing, lower long - term interest rates create more fiscal sp ace for government programs, including infrastructure investment, reducing the cost of expansionary fiscal policy. Lower long - term interest rates should also reduce the cost of borrowing by the private sector, encouraging investments that can enhance growth in the future. However, if rates are low because of subdued expectations about future growth, investment is unlikely to be robust .

For savers, lower equilibrium long - term interest rates would affect the return to savings, the cost of borrowing for homeownership, and lifecycle decisions about when to retire and the time pattern of consumption.

Finally, lower long - term interest rates could have important implications for monetary policy, particularly regarding the zero lower bound for short - term interest rates and specific policy tools. Market participants , in turn, may take these factors into effect when making economic forecasts or planning consumption and investment.

Ultimately, interest rates reflect fundamental macroeconomic conditions and there is no “optimal” rate of interest. The goal of policy should not be to target a particular rate, but to support long - run growth, maintain price stability, and strengthen the resilience of financial markets .

Friday, July 24, 2015

Raise the Gas Tax Already: Senate Majority Leader Mitch McConnell is a conservative Republican. Senator Barbara Boxer is a liberal Democrat. So the fact that they’ve worked together to come up with a plan to fund highway spending for the next three years might seem like a good thing, a rare moment of bipartisanship in a Congress riven by ideological hostility. And, in fact, you could see the thousand-page bill they’ve produced as, in the words of the Times, “real progress,” except for one thing: their complicated, jury-rigged plan is only necessary because of the continued refusal by Congress to embrace the obvious, economically sensible solution to highway funding, namely raising the gas tax. ...

The fundamental problem, of course, is that raising taxes, no matter how economically sensible those taxes might be, is anathema to a huge swath of the Republican Party. ... Opposition to higher income taxes has some theoretical justification: higher marginal rates discourage people from working more and investing. ... But no such argument exists against the gas tax: all it does, in essence, is ask drivers to pay for the roads they use. It’s not even fair to say that keeping this tax at its current level is a check on big government, since most federal highway spending now goes toward rebuilding and repairing roads—maintenance that even conservatives recognize we must do.

Highway revenue has to be raised somehow. Congress should show some political spine, discard the Rube Goldberg funding schemes, and stop treating all taxes as bad ones.

As noted in the article, there are also, of course, environmental benefits from an increase in gas taxes.

Many of us in Western Europe and America feel that our economies are far from just...

With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. ...

How might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.

Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. ... The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.

It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.

We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

I'm skeptical that this is the answer to our inequality/job satisfaction problems.

The Housing Market Still Isn’t Rational: Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.

The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.

The housing market is another matter. It is far less rational than even the often irrational stock market...[explains why]...

The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.

If you don’t know what I’m talking about, the term “Chicago boys” was originally used to refer to Latin American economists, trained at the University of Chicago, who took radical free-market ideology back to their home countries. The influence of these economists was part of a broader phenomenon: The 1970s and 1980s were an era of ascendancy for laissez-faire economic ideas and the Chicago school...

But that was a long time ago. Now a different school is in the ascendant, and deservedly so.

It’s actually surprising how little media attention has been given to the dominance of M.I.T.-trained economists in policy positions and policy discourse. But it’s quite remarkable. Ben Bernanke has an M.I.T. Ph.D.; so do Mario Draghi, the president of the European Central Bank, and Olivier Blanchard, the enormously influential chief economist of the International Monetary Fund. Mr. Blanchard is retiring, but his replacement, Maurice Obstfeld, is another M.I.T. guy — and another student of Stanley Fischer, who taught at M.I.T. for many years and is now the Fed’s vice chairman. ...

M.I.T.-trained economists, especially Ph.D.s from the 1970s, play an outsized role ... in policy discussion across the Western world. And yes, I’m part of the same gang.

So what distinguishes M.I.T. economics, and why does it matter? ...

At M.I.T..., Keynes never went away. To be sure, stagflation showed that there were limits to what policy can do. But students continued to learn about the imperfections of markets and the role that monetary and fiscal policy can play in boosting a depressed economy. ...

This open-minded, pragmatic approach was overwhelmingly vindicated after crisis struck in 2008. Chicago-school types warned incessantly that responding to the crisis by printing money and running deficits would lead to 70s-type stagflation, with soaring inflation and interest rates. But M.I.T. types predicted, correctly, that inflation and interest rates would stay low in a depressed economy, and that attempts to slash deficits too soon would deepen the slump. ...

Meanwhile, in the United States, Republicans have responded to the utter failure of free-market orthodoxy and the remarkably successful predictions of much-hated Keynesians by digging in even deeper, determined to learn nothing from experience.

In other words, being right isn’t necessarily enough to change the world. But it’s still better to be right than to be wrong, and M.I.T.-style economics, with its pragmatic openness to evidence, has been very right indeed.

Thursday, July 23, 2015

Socialism, American-Style, by Gar Alperovitz and Thomas M. Hanna, Commentary, NY Times: The great 20th-century conservative economist Joseph Schumpeter thought the left had overlooked a major selling point in pressing the case for public — i.e., government — control over productive capital. “One of the most significant titles to superiority,” he suggested, was that public ownership produced profits, which means not having to depend on taxes to raise money.

The bulk of the left never took up Schumpeter’s argument. But in an oddly fitting twist, these days the mantra of public control in exchange for lower taxes has been embraced by a surprising quarter of the American political leadership: conservatives.

The most well-known case is Alaska. The Alaska Permanent Fund ... combines not one, but two socialist principles: public ownership and the provision of a basic income for all residents. The fund collects and invests proceeds from the extraction of oil and minerals in the state. Dividends are paid out annually to all state residents. ...

The authors go on to cite many more examples, e.g. the Texas Permanent School Fund and the Texas Permanent University Fund, The Permanent Wyoming Mineral Trust Fund, which "is almost a direct expression of Schumpeter’s doctrine: Socialized ownership has helped to eliminate income taxes in the state," the Tennessee Valley Authority, electricity generation in Nebraska, where "Partly as a result, Nebraskans pay one of the lowest rates for electricity in the nation." They conclude with:

The list goes on. More than 450 communities have also built partial or full public Internet systems, some after significant political battles. Roughly one-fifth of all hospitals are also currently publicly owned. Many cities own hotels, including Dallas...

Moreover, contrary to conventional opinion, studies of the comparative efficiency of modern public enterprise show rough equivalency to private firms in many cases. ...

With skepticism about capitalism growing among minorities and young voters, will we see more such endeavors in the future? Pendulums have a way of swinging, sometimes very sharply, when big economic tsunamis hit. It is possible that in the next big crisis, both sides might see the wisdom and practical benefits of public ownership, and embrace Joseph Schumpeter’s point even more boldly than they do today.

I think this would benefit from separating natural monopolies -- where it is not surprising in the least that costs/prices are lower with public ownership (or strict regulation of prices if privately owned) -- from the other examples. When *significant* market failures justify it, I fully support public ownership. But in most cases I'd prefer private sector ownership with regulatory oversight.

...The Bible of academic research on how colleges affect students is a book titled, plainly enough, “How College Affects Students.” It’s an 848-page synthesis of many thousands of independent research studies over the decades. ...

The sections devoted to how colleges differ from one another are notable for how little they find. As Mr. Pascarella and Mr. Terenzini carefully document, studies have found that some colleges are indeed better than others in certain ways. Students tend to learn more in colleges where they have closer relationships with faculty and peers, for example, and earn a little more after graduating from more selective institutions.

But these findings are overwhelmed in both size and degree by the many instances in which researchers trying to detect differences between colleges found nothing.

“The great majority of postsecondary institutions appear to have surprisingly similar net impacts on student growth,” the authors write. “...in the most internally valid studies, even the statistically significant effects tend to be quite small and often trivial in magnitude.” ...

People can learn a lot in college, and many do. But which college matters much less than everyone assumes. As Mr. Pascarella and Mr. Terenzini explain, the real differences exist at the departmental level, or within the classrooms of individual professors, who teach with a great deal of autonomy under the principles of academic freedom. ... The problem for students is that it is all but impossible to know ahead of time which part of the disunified university is which. ...

The whole apparatus of selective college admissions is designed to deliberately confuse things that exist with things that don’t. Many of the most prestigious colleges are an order of magnitude wealthier and more selective than the typical university. These are the primary factors driving their annual rankings at or near the top of the U.S. News list of “best” colleges. The implication is that the differences in the quality of education they provide are of a similar size. There is no evidence to suggest that this is remotely true. ...

Not sure this captures all the benefits of going to, say, Harvard in terms of social connections that can be valuable later on.

Does rising wealth buy greater happiness?: How much does an increase in wealth increase happiness? If you win the lottery, receive a large unexpected inheritance or some other good fortune comes your way, will it permanently make you happier? ...

So what do we know about living standards during early industrialization? ... The measured decline of mean height during industrialization reflects in large part the nature of the data sources, not necessarily changes in the heights of the underlying populations.

As economies grew, tight labor markets discouraged military enlistments by the most productive workers, with those enlisting (and being measured) increasingly over-representing the less advantaged members of society. The Industrial Revolution posed challenges for those facing the transformations it wrought, but it did not make people shorter.